As Chinese protesters have been taking out frustrations on Japanese foreigners and businesses, Carnegie Endowment for International Peace’s Douglas Paal and the Atlantic magazine’s James Fallows discuss how this conflict between Japan and China is just as much about national pride as it is about potential natural resources.

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MARGARET WARNER:

For more now, I'm joined by Douglas Paal of the Carnegie Endowment for International Peace. He's a former National Security Council and State Department official specializing in Asian affairs.

And James Fallows, national correspondent for "The Atlantic" magazine, he has lived in and written extensively about both Japan and China.

Well, gentlemen, what are we to make of this?

Why, Jim Fallows, have we seen these passions erupt suddenly over these tiny islands?

JAMES FALLOWS, "The Atlantic Monthly": Well, of course there's an immediate cause for this. It's the anniversary of this controversial episode in Chinese history.

And there is the dispute over the islands themselves. But something that's really impressed me over the last 20 years of going to China is how the level of anti-Japanese opinion, if anything, has gone up.

As World War II has receded into the past, the governments' fanning of these resentments seems to have increased. And there seems to be genuine young people popular resentment that comes out in times like this.

MARGARET WARNER:

There did seem to be real rage in the streets. What do you think explains it?

DOUGLAS PAAL, Carnegie Endowment for International Peace: Well, there are very strong statements coming out repeatedly from the Chinese government saying that Japan has stepped across an important line involving Chinese sovereignty.

And sovereignty is the most sensitive issue in the last 150 years in China. And so people naturally will respond to it. There are probably also some efforts to reflect dissatisfaction with the current government in the way it's handling things, hidden messages in these protests.

Carrying Mao Zedong's picture might very well suggest the current leadership is not as strung as Mao Zedong was. There are all kinds of things that take people out on the street.

MARGARET WARNER:

Now, Jim Fallows, is there the same kind of anti-Chinese feeling in Japan? You have lived in both countries.

JAMES FALLOWS:

It's not a symmetrical relationship at all.

China, of course, has — has manifold the population of Japan, what, 10 times more people than Japan does. It's just only recently overtaken its — its GDP. And there is this burning resentment in China of having been occupied by Japan, a memory that is kept alive all the time.

Japan, for its part, I think most people have much less awareness of the Pacific war and their invasion of China. That is, if anything, suppressed in Japanese public memory. And there is not the same sense awareness of giving offense.

And so, also, Japan is a more developed society. It doesn't have these people running through the streets protesting at embassies in the way we're seeing in China now.

MARGARET WARNER:

So, are you all saying that you think the Chinese government has actually encouraged this, or that it's something a little too hot for them to handle?

DOUGLAS PAAL:

It's a combination of both. On the one hand, they have a position to protect. It's a political season both in Japan and China, most notably in China.

And people there are not going to be out-patriotized by other people or criticized for not being nationalistic enough. So, that conditions the atmosphere for the official response.

And then there are people in the streets. You can either let them run wild and pay a price for that. They can't do that. So, they're trying to hold that back under some control.

You can try to lead it and run ahead of the crowd, as has happened several times in Chinese history in the past. Sometimes, governments have stumbled trying to do that. This government seems to be stabilizing the situation.

MARGARET WARNER:

So what's at stake economically here in this sort of trade and investment relationship between these two countries? It's big, isn't it?

JAMES FALLOWS:

A tremendous amount.

And I think, as Secretary Panetta was saying, everybody will lose if this gets out of control.

China has obvious both economic and strategic relationships with the U.S., but also with Japan. If you go to any factory in China, it's sending goods to export in the U.S. and Europe, but the machine tools are from Japan. There's a very, very tight relationship between these economies.

So, it is sort too important a situation for either of them to let really get out of control.

MARGARET WARNER:

You have been involved, Doug Paal, in trying to encourage or facilitate investment in — especially in China, but in Asia.

Are Japanese businesses — do you think they could possibly think twice about their investments in China?

DOUGLAS PAAL:

They will think twice.

They have made a big bet on China as the platform for their industrial production, because Japanese costs and populations are going in opposite directions.

And so China has got a big — Japan has a big $80 billion-plus investment and a $345 billion trade relationship.

MARGARET WARNER:

And by investment, you mean there are factories there, there are businesses there.

DOUGLAS PAAL:

Factories…

MARGARET WARNER:

They're selling and — making and selling.

DOUGLAS PAAL:

Right. They're big in Chinese market, as well as using it as an export platform for other markets, including our own and in Japan.

MARGARET WARNER:

So, Jim, is this — do you think this — oh, I'm sorry. You wanted to make another comment first?

JAMES FALLOWS:

I was just going to say that we're seeing things about China that reflect the difficulties it's still having emerging as a fully modern state from this, the crowds of people running through the streets, to the governments both encouraging and being somewhat fearful of this nationalistic sentiment.

And we're seeing editorials in the last day or two urging people to sort of ratchet it back down, that violence is not an answer.

MARGARET WARNER:

But explain. You said you have noticed in all your years going back how much more virulent the anti-Japanese sentiment is. Give us one example.

JAMES FALLOWS:

I will give an example.

If you talk to college students who are 18 or 19 years old whose grandparents might have suffered under Japanese oppression during World War II, they will talk about how they burn with hostility about what the Japanese did to them.

It's as if you found people in Israel right now being mainly angry at Germany, which is not the main animating sentiment in Israel right now. So, it's a real, real conundrum.

MARGARET WARNER:

So, now, how does — the U.S., of course, has different relationships with Japan and China.

Is that a factor in all of this, or there is something else?

DOUGLAS PAAL:

Well, I don't think the Chinese want the U.S. to be a factor, but the U.S. is the ally of Japan.

And the United States has declaratory policy of long standing that, despite the fact that these territories are disputed, Japan administers them and we would support the defense of those islands in a crisis.

And so the U.S. is in the game.

What's been interesting is, in the last couple of days, as your lead-up showed, Secretary Panetta has gone to Japan first, showed our important alliance strength, and still managed to go to China and have what is on first notices a pretty solid visit and a constructive visit with the Chinese.

They make their points about Japan, but they're making very positive points about deepening and strengthening the U.S. military-to-military relationship, something both Washington and Beijing have agreed they need to do.

MARGARET WARNER:

So, where is this headed?

JAMES FALLOWS:

It looks at the moment as if it's backing off. I think all sides have an interest is not letting it become a genuine crisis.

It also is a reminder to the United States of why it is seen as important by many nations in Asia that we stay as a sort of balancing factor in the military relationship there.

MARGARET WARNER:

Except, China doesn't like that.

JAMES FALLOWS:

Well, they would prefer it to having a Japan arm itself.

So, everybody is — everybody resents the U.S. presence, but it is more comforting than the most obvious alternative.

MARGARET WARNER:

Do you have a fearless prediction?

DOUGLAS PAAL:

I think it is going to calm down, but the issues will be simmering for some time.

All the territorial maritime issues that are taking place now are of a piece.

And the political process is still playing out in China, so that the leaders there want to contain the damage to themselves, but they don't want to be so suppressing of popular opinion that they're seen as opposing popular will on the issue of sovereignty.